Doctors' Advisors Share Their Best Year-End Tax Tips

Dennis G. Murray, MA

October 21, 2019

Here's how it works. You decide on a lump sum that represents the amount you want to donate and establish an account with a brokerage firm or a mutual fund company, from which you can earmark funds to transfer to your favorite charities. Instead of cash, many doctors choose to donate shares of mutual funds or stock that have grown in value, which saves them from paying capital gains in addition to enjoying a tax deduction.

Want to put in, say, $30,000 in assets and send it to six charities in varying amounts? That's fine. Just know, however, that once you make a contribution to your DAF, the IRS won't let you take it back. So if you expect to need some of that money this year for other reasons—a new roof on your home, for instance—think twice about the amount you put into a DAF.

Not everyone wants to give this much away to charities. But for those who do, there are clear advantages. For example, a salaried orthopedist who files jointly and has no other deductions could save an additional $1792 on her 2019 tax return if she's in the 32% tax bracket (income over $160,725 as an individual filer; $321,450 when filing jointly) and assuming she puts $30,000 in a DAF before the end of the year. (Naturally, the tax savings will be greater the more you put in the account.) Even better, you can make additional contributions at any time, as your financial situation allows.

The amount you put into the DAF has to be higher than the standard deduction, or there won't be a tax saving. For instance, you won't get any tax advantages from your contributions to charity if, after they're combined with the total of your other itemized deductions, they're less than the amount of your standard deduction. So given the higher standard deductions, you may need to make much larger gifts to your favorite charities in 2019 and beyond.

"Some of my clients donate a lump sum that's in the range of three to four times the amount they typically contribute to charity annually, to put them over the standard deduction, allowing them to itemize. Then, in the following 2 or 3 years, because they're not making any new contributions to the DAF, they take the standard deduction," says Joel Greenwald, MD, CFP, a financial adviser in St Louis Park, Minnesota. You can, of course, continue to direct annual donations to your favorite charities from the DAF even if you're not funding it every year.

If a DAF sounds too constraining, you could instead "bunch" smaller amounts on your own throughout the year, which in total exceed your standard deduction. But whichever charitable route you choose, do a little homework first. To determine whether an organization is truly tax-exempt for tax purposes, take a minute to search the charity's name on the IRS' website. You don't want to find out later that your donations don't qualify for a tax break because the "charity" was actually a sham operation.

A final word on DAFs: If you're interested in starting one, don't linger. "A DAF can take some time to set up, especially if you're using shares of highly appreciated stock to fund the account," cautions Stepp. "Some of the brokerage firms will put a deadline of December 1 or 15 to process everything in order for the contribution to count for 2019."

Ask Your Accountant or Advisor for Individual Tax Strategies

Besides the suggestions offered by our financial pros, there will probably be other tax strategies that apply to your own situation. For instance, you may have kids whose educations you're saving for, an ailing parent you're helping to care for, or winning (or losing) investments that you've sold this year. All of these scenarios involve tax issues, so discuss them with your accountant and other tax advisors, as well as produce all relevant documentation.

It's helpful if your relationship with your accountant or advisor is a two-way street—with regular interactions throughout the year, not just during tax season.

"Lots of people complain that their CPAs are reactive—they hand over the documents, such as W-2s and 1099s, and the CPA crunches the numbers and prepares the return. The client later complains that the CPA didn't give them any useful tax-savings strategies," says Greenwald. It's helpful if your relationship with your accountant or advisor is a two-way street—with regular interactions throughout the year, not just during tax season, he adds.

So talk about these things now, before the clock ticks down to 2020. What you do together over the next weeks and months can help you to pay as little as possible in taxes next spring.

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